The High-Speed Rail Investment Act of 2001 (S. 250) (25-JUN-01,
GAO-01-756R).
The High-Speed Rail Investment Act of 2001 would allow the
National Railroad Passenger Corporation (Amtrak) to issue up to
$12 billion in "tax credit bonds" over 10 years, primarily for
capital improvement projects designated high-speed rail corridors
and on Amtrak's Northeast Corridor. This report reviews the (1)
cost of the bond-financing mechanism and alternatives to the U.S.
Treasury, (2) degree to which bond proceeds would meet the
capital needs of federally designated high-speed rail corridors,
and (3) extent of the federal oversight role. GAO found that the
(1) estimated tax credit for Amtrak bonds would cost the U.S.
Treasury between $16.6 billion and $19.1 billion (in nominal
dollars) over 30 years, (2) overall capital needs of fully
developed federally designed high-speed rail corridors are
unknown because these initiatives are in various stages of
planning, but preliminary estimates by Amtrak puts the capital
costs for fully developed high-speed rail corridors and its
Northeast Corridor at between $50 billion and $70 billion over 20
years, and (3) bill provides specific responsibilities to the
Departments of the Treasury and Transportation. Specifically, the
Secretary of the Treasury is required to report annually on
whether the amount of money in the trust account is sufficient to
repay the bonds. The Department of Transportation's role is to
approve projects from those selected by Amtrak prior to Amtrak's
issuing the bonds.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-756R
ACCNO: A01406
TITLE: The High-Speed Rail Investment Act of 2001 (S. 250)
DATE: 06/25/2001
SUBJECT: Federal aid to railroads
Railroad industry
Tax credit
Amtrak Northeast Corridor
Amtrak Northeast Corridor High-Speed
Rail Program
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GAO-01-756R
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001
June 25, 2001 The Honorable Wayne Allard The Honorable Robert F. Bennett The
Honorable Christopher S. Bond The Honorable Phil Gramm The Honorable John
McCain The Honorable Richard C. Shelby The Honorable Bob Smith United States
Senate
Subject: The High- Speed Rail Investment Act of 2001 (S. 250) The High-
Speed Rail Investment Act of 2001 (S. 250) would allow the National Railroad
Passenger Corporation (Amtrak) to issue up to $12 billion in ?tax credit
bonds? over 10 years, primarily for capital improvement projects on
designated highspeed rail corridors and on Amtrak?s Northeast Corridor. 1
(See encl. I for a summary of the bill.) You asked us to assess selected
aspects of the bill, including (1) the cost of the bond- financing mechanism
and alternatives to the U. S. Treasury, (2) the degree to which bond
proceeds would meet the capital needs of federally designated highspeed rail
corridors, and (3) the extent of the federal oversight role. On May 16,
2001, we provided representatives of your offices with the preliminary
results of our review. Enclosure II contains the briefing slides that formed
the basis of our presentation.
In summary, we estimate that the tax credit for Amtrak bonds would cost the
U. S. Treasury between $16.6 billion and $19.1 billion (in nominal dollars)
over 30 years. 2 In present value terms, we estimate that the cost of these
tax credits to the Treasury would be between $7.7 billion and $10 billion. 3
The total cost of the bond program
1 Amtrak is a private corporation that provides the nation?s intercity
passenger rail service. Under the bill, bondholders would receive tax
credits rather than interest payments. Ten high- speed rail corridors (with
train speeds of at least 90 miles per hour) have been designated either by
legislation or by the Department of Transportation. Amtrak?s Northeast
Corridor runs from Boston to Washington, D. C. (See fig. I in encl. II.)
2 The tax credit that bondholders would receive is the product of the
interest rate on outstanding longterm corporate debt and the outstanding
face amount of the bond. 3 A present value computation adjusts the value of
dollars spent (or received) in the future to make them comparable with
dollars spent (or received) today. Among other things, this adjustment is
important when comparing the costs of a program that extends over 30 years,
such as the S. 250 bond program, with a program whose costs to the
government occur much sooner, such as one funded with annual appropriations.
United States General Accounting Office Washington, DC 20548
GAO- 01- 756R High- Speed Rail Investment Act of 2001 2 could increase to
about $11.2 billion (in present value terms) if states finance their
contributions with tax- exempt borrowing and Amtrak uses its accumulated
losses to offset otherwise taxable earnings in the trust account established
for the repayment of bond principal. We estimate that the cost of providing
equivalent annual appropriations would be between $7.3 billion and $8.2
billion in present value terms. 4 As a result, the cost of the tax credits
to the U. S. Treasury under the bond approach would be at least $400 million
greater and could be more than $3 billion greater (in present value terms)
than providing annual appropriations of an equivalent amount.
The overall capital needs of fully developed federally designated high-
speed rail corridors are unknown because these initiatives are in various
stages of planning. However, a preliminary estimate by Amtrak puts the
capital costs for fully developed high- speed rail corridors and its
Northeast Corridor at between $50 billion to $70 billion over 20 years.
Regarding the federal oversight role, the bill provides specific
responsibilities to the Departments of the Treasury and Transportation.
Specifically, the Secretary of the Treasury is required to report annually
on whether the amount of money in the trust account is sufficient to repay
the bonds. 5 Another responsibility is to determine, as part of its overall
responsibilities under the Internal Revenue Code, whether tax credits
claimed by taxpayers qualify under S. 250. According to Treasury and
Internal Revenue Service officials, the bill and other provisions of the
Internal Revenue Code provide them with sufficient authority to do so. The
Department of Transportation?s role is to approve projects from those
selected by Amtrak prior to Amtrak?s issuing the bonds. In approving the
projects, the Department may give preference to projects with state matching
contributions above the required 20 percent and shall consider the regional
balance for infrastructure investment and the national interest in
developing high- speed passenger rail projects. 6 Federal Railroad
Administration officials told us that more specific criteria could aid the
Department in approving projects. Finally, the bill provides Amtrak with
significant programmatic responsibilities for the development of high- speed
passenger rail, including selecting projects to be funded. The bill requires
that projects funded through Amtrak bonds be likely to financially benefit
Amtrak. Yet, projects that might make the most
4 Under the annual appropriations approach, the federal government would
provide $960 million a year for 10 years and states would contribute $240
million a year for 10 years, resulting in $12 billion becoming available for
passenger rail projects. The state contribution that we assumed is identical
to the contribution required under S. 250.
5 States provide at least 20 percent of the cost of the project to be
financed with bond proceeds. State matching contributions, temporary period
investment earnings on bond proceeds, and earnings on these amounts would be
held in a trust account by a trustee independent of Amtrak. Amounts in the
trust account would be used to redeem the bonds.
6 The Department?s approval includes a determination by its Inspector
General that projects would be financially beneficial to Amtrak and that
Amtrak?s investment evaluation process includes consideration of the return
on investment, leveraging of funds, cost effectiveness, safety and mobility
improvements, and feasibility.
GAO- 01- 756R High- Speed Rail Investment Act of 2001 3 important
contributions to national transportation goals may not necessarily make
the greatest (or any) financial contributions to Amtrak and vice versa. S.
250 is being proposed as one means of providing increased federal funding
for intercity passenger rail and high- speed rail. Amtrak?s most recent
capital and finance plan calls for $30 billion (as measured in 2000 dollars)
in federal funding over 20 years to upgrade its operations and to invest as
seed money in high- speed rail corridors. Also, as discussed earlier in this
letter, the capital needs to fully develop Amtrak?s Northeast Corridor and
the federally designated high- speed corridors could be in the $50 billion
to $70 billion range, with much of this funding expected to come from the
federal government. In March 2001, we testified that a number of benefits-
such as reducing congestion and increasing travel choices- have been
attributed to Amtrak and high- speed passenger rail systems. 7 These claimed
benefits need to be realistically examined to guide the Congress in its
decisions over the potentially large funding of such systems.
Agency Comments and Our Evaluation
We sent a draft of this report to Amtrak, the Department of the Treasury,
the Internal Revenue Service, and the Department of Transportation for their
review and comment.
We met with several Amtrak officials on June 7, 2001, including a Senior
Director for Finance and a Director for Government Affairs. Amtrak
supplemented its comments with a letter on June 14. (See encl. IV.) In its
letter, Amtrak stated that it concurred with many of our observations on the
bill. Amtrak emphasized that it believes that the bill is an important first
step in providing seed money and building the partnerships with states,
localities, and freight railroads critical to the development of high- speed
rail in the United States. Amtrak believes that a bond approach is a viable
way to provide such funds, especially since the prospects of receiving
appropriations are not encouraging. In addition, Amtrak stated that the bond
approach is attractive because it generates a considerable amount of funds
in a relatively short period of time.
In its letter Amtrak commented on our observation that if the amount in the
trust account is inadequate to repay the bonds upon maturity, the federal
government may be asked to make up any shortfall. Amtrak stated that the
bill makes it clear that the obligation to repay the principal of the bonds
at maturity rests with Amtrak and not the federal government. We agree that
the United States would not be legally liable for these obligations.
Nevertheless, we recognize that bondholders could attempt to recover losses
from the federal government. To address this issue a provision could be
added to the bill stating that the federal government does not explicitly or
implicitly guarantee repayment of bond principal.
7 Intercity Passenger Rail: Assessing the Benefits of Increased Federal
Funding for Amtrak and High- Speed Passenger Rail Systems (GAO- 01- 480T,
Mar. 21, 2001).
GAO- 01- 756R High- Speed Rail Investment Act of 2001 4 In our June 7
meeting, Amtrak offered a number of specific comments on our draft
report. First, Amtrak stated that we overstated the bond bill?s cost to the
Treasury since the tax credits received by bondholders are treated as
taxable income under S. 250. Thus, Amtrak believes that the cost to the
Treasury of the bond program is the cost of the tax credits less the
increased income tax liability of the bondholders who take the tax credits.
We disagree. We assumed that if investors did not invest in S. 250 bonds
they would have invested in other taxable instruments. Thus, the investor
would have incurred a similar additional tax liability in either case, and
there would be no additional tax revenue as a result of the credit.
Second, in our June 7 meeting, Amtrak receded from its statement that an
important consideration in its selection of high- speed rail projects would
be the degree to which the projects are financially beneficial to Amtrak.
Among other things, Amtrak said that it cannot determine selection criteria-
and which of the criteria will have greater weight- until legislative action
on the bill has been completed. We agree with Amtrak?s comment and have
deleted Amtrak?s previous view from our report.
Third, during our review Amtrak told us that it was more appropriate to
compare the cost of another guaranteed source of funds to the bond program,
rather than annual appropriations. To address Amtrak?s view, we provided an
example of a guaranteed source of funds in our draft report because Amtrak
did not offer one of its own. In our June 7 meeting, Amtrak offered a
sinking fund approach as a guaranteed source of funds to compare with the
bond program. Under this approach, the Congress would provide Amtrak with a
single appropriation. These funds would then be invested and the investment
earnings would be added to the fund. Amtrak would draw down $960 million a
year for 10 years from the fund. States would provide $240 million a year,
thus making $1.2 billion a year available for high- speed rail projects, an
amount equal to the amount that could become available under the bond
program (not considering that bond proceeds may be used to defray bond
issuance and other costs). We substituted Amtrak?s approach for the example
that we had devised. Depending on the rate of return assumed, we estimate
that the Congress would have to appropriate between $7 billion and $8.3
billion (in present value terms) for the sinking fund. 8 In present value
terms, we estimate that the S. 250 bond program would cost the Treasury from
at least $700 million more to over $2.9 billion more (in present value
terms) than Amtrak?s sinking fund approach (see encl. II and III).
Fourth, in our June 7 meeting, Amtrak said that we should have contacted
investment firms as part of our work because these firms could provide
insights into how the investment community might view the bonds as
investments. We did not do so because we assumed that investors would view
the Amtrak bonds as similar to other risk- adjusted taxable bonds. Finally,
Amtrak officials offered a number of clarifying and technical comments and
we made changes to the report where appropriate.
8 These amounts assume that states finance their contributions with tax-
exempt borrowing and Amtrak uses its accumulated losses to offset otherwise
taxable earnings in the sinking fund.
GAO- 01- 756R High- Speed Rail Investment Act of 2001 5 Neither the
Department of the Treasury nor the Internal Revenue Service chose to
comment on our draft report. The Department of Transportation commented that
the portion of the draft transmittal letter summarizing the cost of the bond
program was confusing and appeared to unfairly compare the cost of the
program with the face value of the bonds. We agree with the Department and
revised our presentation to improve its clarity.
Scope and Methodology
To carry out our work, we reviewed the High- Speed Rail Investment Act of
2001, as introduced on February 6, 2001. We discussed the bill with
officials from the Federal Railroad Administration within the Department of
Transportation, the Internal Revenue Service and the Office of Tax Analysis
within the Department of the Treasury, Amtrak, four of the seven large
freight railroad systems over which highspeed rail service might operate,
and representatives from 20 states within federally designated high- speed
rail corridors. We also reviewed Amtrak?s February 2001 finance and capital
plan, the Amtrak Reform Council?s 2001 annual report, the Federal Railroad
Administration?s May 2000 report on high- speed rail systems, and selected
project descriptions for high- speed rail corridors. In addition, we
interviewed tax officials from five states and obtained property tax data on
railroad property. Enclosure III describes how we estimated lost tax revenue
associated with these bonds and the cost of alternative grant approaches.
We performed our work from March through June 2001 in accordance with
generally accepted government auditing standards.
We are sending copies of this report to congressional committees with
responsibilities for transportation issues; the Secretary of the Treasury;
the Commissioner of Internal Revenue; the Secretary of Transportation; the
Acting Administrator of the Federal Railroad Administration; the Director,
Office of Management and Budget; and the President and Chief Executive
Officer of Amtrak. We will also make copies available to others upon request
and on our home page at http:// www. gao. gov.
GAO- 01- 756R High- Speed Rail Investment Act of 2001 6 As arranged with
your offices, unless you publicly announce its contents earlier, we
plan no further distribution of this report until 14 days after the date of
this letter. If you or your staff have any questions about this report,
please contact me at (202) 512- 2834. Key contributors to this report were
Kevin Daly, Helen Desaulniers, Paul Posner, Teresa Russell, James
Ratzenberger, and James Wozny.
John H. Anderson, Jr. Managing Director, Physical
Infrastructure Issues Enclosures - 4
Enclosure I 7 GAO- 01- 756R High- Speed Rail Investment Act of 2001
A General Description of the High- Speed Rail Investment Act of 2001
The bill authorizes Amtrak to issue up to $1.2 billion in tax credit bonds
each year from 2002 through 2011. 9 Unused bond authority in any 1 year can
be carried over to the following year, through 2015.
Bondholders receive a credit on their federal income taxes instead of
interest payments. The credit is the product of the interest rate on
outstanding long- term corporate debt and the outstanding face amount of the
bond.
Bond Funds for Capital Projects
With limited exceptions, bond proceeds are to be used for the acquisition,
financing, or refinancing of equipment, rolling stock, and other capital
improvements, including station rehabilitation or construction, track or
signal improvements, or the elimination of grade crossings (the intersection
of railroad tracks and roads).
No more than $3 billion in bond authority may be used for Amtrak?s
Northeast Corridor or any one designated high- speed rail corridor. No more
than $100 million may be used in any 1 year for projects on other intercity
passenger rail corridors (for increasing speeds up to 90 miles per hour).
Finally, the Secretary of Transportation may allocate a portion of the bond
authority to the Alaska Railroad.
At least 95 percent of bond proceeds must be used on qualified projects.
Bond proceeds may be used for independent assessments of projects? costs and
benefits (see below). Amtrak must reasonably expect to spend at least 95
percent of the proceeds of a bond issue on qualified projects within 5 years
and must exercise due diligence to complete projects and spend such
proceeds.
Project Selection and Approval
The Secretary of Transportation must approve projects selected by Amtrak
for funding before Amtrak issues bonds. The Secretary may give preference to
those projects with state contributions exceeding 20 percent of the
projects? costs (see below). The Secretary shall consider regional balance
in infrastructure investment and the national interest in ensuring the
development of a nationwide high- speed rail transportation network.
In addition, the Department?s Inspector General must find that there is a
reasonable likelihood that proposed projects will result in a positive
financial return to Amtrak and that the investment evaluation process
includes
9 As introduced (the ?star print? on Feb. 6, 2001). The provisions of the
bill could change during the legislative process. For example, the bill?s
sponsors expect that the provisions on state and local tax exemption and the
ability of states to use federal funds for their matching contributions,
summarized below, will be removed.
Enclosure I
GAO- 01- 756R High- Speed Rail Investment Act of 2001 8 consideration of the
return on investment, the leveraging of funds, cost
effectiveness, safety and mobility improvements, and feasibility.
For certain projects, Amtrak must enter into agreements on the scope and
the estimated cost of the projects and their impact on freight capacity with
the freight railroads whose properties are to be improved by the projects.
State Contributions to Redeem the Bonds
A state whose high- speed rail project is to be funded with bond proceeds
must contribute at least 20 percent of the project?s cost. This contribution
is to be held in a trust account and used, along with investment earnings on
bond proceeds and other earnings, to redeem the bonds issued for the
project. Excess state contributions must be used to fund other projects or
redeem other qualified Amtrak bonds.
States may use federal funds, including amounts made available from the
Highway Trust Fund, for their contributions, as well as the value of land
contributed for a high- speed rail right- of- way.
Oversight of the Use of Bond Funds
The Internal Revenue Service determines whether amounts claimed as tax
credits qualify under S. 250. If a bond issued under the act ceases to be a
qualified Amtrak bond in any 1 year, Amtrak must repay the amounts allowed
as tax credits for that year plus amounts allowed for the preceding 2 years
(plus interest). If Amtrak fails to repay these amounts, the bondholders
become liable.
The Secretary of the Treasury is to report annually to the Congress on
whether amounts in the trust account are sufficient to repay the bonds.
Amtrak is required to contract for an annual independent assessment of the
costs and the benefits of the projects undertaken, including an assessment
of the corporation?s investment evaluation process.
Other Provisions
Freight railroads are not liable for taxes and fees imposed by the
Internal Revenue Code or by any state or local government with respect to
the acquisition, improvement, or ownership of (1) personal or real property
funded by the proceeds of the bonds or any state or local bond or revenues
or income from such acquisition, improvement, or ownership and (2) rail
lines in designated high- speed rail corridors that are leased by Amtrak.
Enclosure II 9 GAO- 01- 756R High- Speed Rail Investment Act of 2001
Financial and Oversight Issues Associated With the High- Speed Rail
Investment Act of 2001
1
High- Speed Rail Investment Act of 2001 (S. 250)
2
To assess * the total cost of the proposed financing mechanism; the cost
of the proposed financing mechanism as compared
to a grant program funded by annual appropriations; the degree to which
$12 billion would meet the capital needs
of high- speed rail projects; the extent of the federal oversight role;
Objectives
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 10
3
Objectives
the financial impact of the tax exemption provisions on states;
the financial impact of the bill on freight railroads;
the extent to which federal funds, including highway trust fund monies,
can be used for the state matching requirement; and
the extent to which prior debt incurred by Amtrak and the states could be
reimbursed or paid off.
4
Background
S. 250 allows Amtrak to issue up to $12 billion in tax credit bonds ($ 1.2
billion each year) from 2002 through 2011. Bondholders receive a credit
against their federal income taxes instead of interest payments.
With limited exceptions, bond proceeds are to be used for the acquisition,
financing, or refinancing of equipment, rolling stock and other capital
improvements, including station rehabilitation or construction, track or
signal improvements, or the elimination of grade crossings.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 11
6
Background
Figure 1: Designated High- speed Rail Corridors and Amtrak?s Northeast
Corridor
Empire Corridor Northern New England Corridor Keystone
Corridor Northeast Corridor
Southeast Corridor
Florida Corridor Gulf Coast
Corridor South Central
Corridor Chicago Hub
California Corridor
Pacific Northwest Corridor
Montreal Portland/ Auburn Boston Albany
New York City Philadelphia Washington, D. C.
Hampton Roads Raleigh
Columbia Jacksonville
Orlando Miami Tampa Atlanta
Charlotte Louisville Indianapolis
Detroit Chicago Minneapolis/ St. Paul
Kansas City Tulsa Oklahoma City
Dallas/ Ft. Worth Los Angeles
San Diego Sacramento
San Francisco Bay Area
Eugene Portland
Seattle Vancouver
San Antonio Houston
St. Louis Mobile New Orleans Little Rock
Birmingham Buffalo
Cleveland Pittsburgh
Richmond
5
Background
Eligible projects must be located on
Amtrak?s Northeast Corridor,
corridors designated by legislation or the Secretary of Transportation as
high- speed corridors (see fig. 1),
other intercity passenger rail corridors (for increasing speeds up to 90
miles per hour), and
the Alaska Railroad.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 12
7
Background
With the exception of projects for the Alaska Railroad, participating states
must contribute at least 20 percent of the cost of the project to be
financed with bond proceeds. These contributions, along with investment
earnings on bond proceeds and earnings on these amounts, are to be held in a
trust account by an independent trustee and used to redeem the bonds.
8
Valuing the Costs of the 30- Year Bond Program
Federal budget numbers are stated in ?nominal? dollars, meaning that no
distinction is made between dollars spent (or received) today and dollars
spent (or received) in future years.
However, costs of long- term programs should be compared in present value
terms. A present value computation adjusts the value of dollars spent (or
received) in future years to make them comparable to dollars spent (or
received) today.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 13
9
Valuing Costs
For example, current interest rates on long- term bonds indicate that, to
the government and investors, the present value of a dollar to be spent 30
years from now is less than 25 cents. As a result, those dollars should not
be treated as equivalent to dollars spent today, or in the next few years.
Among other things, this adjustment is important when comparing the costs of
a program that extends over 30 years, such as the S. 250 bond program, with
a program under which the costs to the government occur much sooner, such as
one funded with annual appropriations.
10
Tax Credit Bond Program Estimated to Cost More Than $16 Billion
We estimate that over the 30- year life span of the bond program the
Treasury would forgo revenues amounting to between $16.6 billion and $19.1
billion in nominal dollars (between $7.7 billion and $10 billion in present
value) due to the tax credits.
The size of this loss will depend on future interest rates, which will
determine the amounts of the tax credits.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 14
11
Cost of the Bond Program
The Treasury could incur an additional revenue loss if states increased
their tax exempt borrowing to finance their matching contributions. We
estimate that this loss would be less than $1 billion in nominal dollars
(less than $0.6 billion in present value).
If states do not issue additional tax exempt bonds, there would be no
additional loss.
12
Cost of the Bond Program
The Treasury would incur a further revenue loss if Amtrak used its
accumulated losses to offset the taxable earnings of the trust account. We
estimate that if Amtrak?s entire accumulated losses to date (in excess of $5
billion) were used to offset these earnings, the additional revenue loss
could be as much as $0.4 billion in nominal dollars ($ 0.6 billion in
present value), depending on:
the size of the account?s earnings;
the extent to which money in the account would have earned a taxable
return elsewhere, in the absence of S. 250.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 15
13
Cost of the Bond Program
If in the future Amtrak accumulates additional losses that can only be used
to offset income of the trust account, then the additional revenue cost to
the Treasury could be greater.
However, if future federal subsidies are treated as taxable income to Amtrak
and these subsidies are large enough to make Amtrak profitable, then this
additional revenue loss may not occur and there may even be a revenue offset
to the federal costs.
Amtrak?s most recent financial statement notes that (in the absence of S.
250) it is unlikely to be able to use its accumulated losses.
14
Appropriations Could Be Less Costly Than the Bond Program
We estimate that the tax credit bonds could cost the Treasury from $0.4
billion to over $3 billion more than a grant program funded through annual
appropriations (in present value). Annual appropriations are typically the
mechanism used to fund Amtrak?s capital improvements.
As discussed earlier, the cost of the bond program could be as low as $7.7
billion in present value.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 16
15
Appropriations
We estimate that the Congress could provide the same amount of funding for
high- speed rail through annual appropriations, at a cost as low as $7.3
billion in present value-- or $0. 4 billion less than the lower estimate of
the bond program. (We assume that state contributions would remain the same
as under S. 250.)
Also as discussed earlier, the cost of the bond program could exceed $11.2
billion in present value if (1) future interest rates are higher than
current projections; (2) states finance all of their contributions with
additional tax exempt bonds; and (3) Amtrak uses at least $5 billion of
(otherwise unusable) accumulated losses to offset the income of the fund.
16
Appropriations
Using the same assumptions about the financing of state contributions for
the higher bond program estimate, we estimate that providing the same amount
of funding through annual appropriations (with state contributions) could
cost as much as $8.2 billion in present value-- or $3 billion less than the
higher estimate for the bond program.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 17
18
Appropriations
We estimate that the bond program would cost the Treasury at least $700
million more and could cost over $2.9 billion more than Amtrak?s sinking
fund approach in present value terms.
17
Appropriations
Amtrak believes that the appropriate comparison would be another guaranteed
funding source (e. g., appropriating about $7 billion at one time, which
could be invested and used as a sinking fund, with state contributions the
same as under S. 250).
We estimate that the cost of this sinking fund alternative would be
between about $7 billion and $8. 3 billion (in present value terms)
depending on assumptions relating to the rate of return earned by the fund,
the states? issuance of tax- exempt bonds to finance their contributions,
and Amtrak?s ability to offset the fund?s earnings with its tax losses.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 18
19
Appropriations
Both the bond program and the appropriations alternative would provide about
$12 billion in funding for high- speed rail (worth between $9.1 billion and
$9.6 billion in present value).
The exact amount of money provided for high- speed rail projects through
the bond program depends on (1) bondissuance costs and (2) whether the bonds
will be sold at, above, or below par value.
20
Appropriations
Financing through the tax code can be a means of achieving certain federal
objectives. However, several budgetary implications arise from adopting this
approach.
Using S. 250?s funding mechanism, high- speed rail is funded without
competing for resources within the appropriations process. (Funding high-
speed rail through the appropriations process could result in lower spending
for other discretionary programs.)
Under the Budget Enforcement Act, other entitlement spending would have to
be cut or taxes increased if S. 250 is enacted. If the rules are waived, the
surplus would be lower.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 19
21
Appropriations
Once enacted, programs funded through the tax code typically receive less
scrutiny than those that receive annual appropriations.
22
$12 Billion Will Not Meet the Capital Needs of High- Speed Rail Corridors
Estimates of the total capital costs are incomplete because of the status
and changing nature of the federally designated corridor initiatives.
Some of the projects identified within the designated corridors might be
cancelled or might be altered.
Some states within existing corridors do not have an estimate of their
capital costs. For example, four of the states we contacted could not
provide us with an estimate because they had just begun planning.
Some states have said their estimates of capital needs may increase if
additional corridors were identified.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 20
23
Capital Needs
Although a reliable estimate of the capital needs is not available, $12
billion will not be enough. Amtrak?s preliminary estimate to fully develop
the 10 federally designated corridors and its Northeast Corridor is between
$50 billion and $70 billion in capital over the next 20 years.
Representatives from 16 states within the designated corridors told us
they currently estimate their total capital needs at $18.2 billion. Thirty-
four states are participating in the development of high- speed rail.
24
Departments of the Treasury and Transportation Have Specified Roles
The bill assigns specific responsibilities to the Departments of the
Treasury and Transportation.
The Secretary of the Treasury monitors the use of the bonds as a financing
mechanism.
The bill requires the Secretary of the Treasury to report annually on
whether or not the amount of money in Amtrak?s trust fund is sufficient to
pay off the issued bonds.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 21
25
Federal Roles
According to Treasury and IRS officials, the bill and other provisions of
the Internal Revenue Code provide them with sufficient authority to
determine whether amounts claimed as tax credits qualify under S. 250.
IRS officials told us they would have to write tax regulations for S. 250
but the 90 days provided in the bill would not be enough time.
26
Federal Roles
The Secretary of Transportation approves projects selected by Amtrak prior
to bond issuance.
The Secretary?s approval includes the Inspector General?s determination
that projects would be financially beneficial to Amtrak and that Amtrak?s
investment evaluation process includes consideration of the return on
investment, leveraging of funds, cost effectiveness, safety and mobility
improvements, and feasibility.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 22
27
Federal Roles
In approving qualified projects, the Secretary
may give preference to projects with state matching contributions above
the required 20 percent.
shall consider regional balance for infrastructure investment and the
national interest in ensuring the development of high- speed passenger rail
when approving projects.
Federal Railroad Administration officials told us more specific criteria
would aid the Secretary in approving projects.
28
Federal Roles
The bill provides Amtrak with significant programmatic responsibility for
the development of high- speed passenger rail.
Amtrak officials told us they will consider the factors identified in S.
250 in selecting projects-- financial benefits to Amtrak, the amount of the
state match (more than 20 percent), and improvements to mobility and safety,
among other things.
Amtrak is required to contract for an annual independent assessment of the
costs and the benefits of projects receiving bond financing.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 23
29
Impact on State and Local Government Revenues Cannot Be Reliably Estimated
S. 250 exempts railroads from certain state and local taxes. Bill sponsors
expect that these provisions will be removed.
The impact of S. 250 on state and local tax revenues cannot be reliably
estimated because:
the exemptions are subject to varying interpretations,
it is unclear how states would implement the exemptions, and
it is unknown what property would be acquired or improved with the
proceeds of the Amtrak bonds and the state or local tax exempt bonds and
what rail lines would be leased by Amtrak.
30
Exemptions are Subject to Different Interpretations
One provision of S. 250 clearly exempts railroads from state and local taxes
attributable to acquisitions and improvements funded by proceeds of Amtrak
bonds or state or local bonds, and from taxes otherwise due on revenues or
income from the acquired or improved property.
Under a broader (and less reasonable) interpretation, the exemption might
also apply to state and local taxes on the total value of the property
improved.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 24
31
Exemptions
A second provision of S. 250 would exempt Amtrak- leased rail lines
(presumably roadbed and track) in designated corridors from state and local
property taxes. The exemption would not be limited to improvements on these
lines.
Under a broader (and less reasonable) interpretation, the exemption might
also apply to taxes in addition to property taxes.
32
How the Property Tax Exemption Would Be Implemented Is Unclear
How states would value improvements of railroad property is unclear because
an improvement at one location in the rail system may also be viewed as an
improvement in the performance (and therefore the value) of other parts of
the system.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 25
33
Implementation
The valuation of improvements and acquisitions would pose additional
difficulties for the states that use the unitary method of property
valuation (under which the total value of the railroad is determined
nationwide and allocated by formulas to specific states, then to localities
within the states). Thirty- nine states use this approach.
It is not clear how these states would adjust the formulas or otherwise
change the unitary method to ensure that an improvement or acquisition
funded with bond proceeds is not taxed.
34
Property Tax Exemption?s Impact Would Vary by Locality and Type of Property
Current property tax collections indicate that the revenue effect of the
exemption would vary by locality and type of property.
For example:
Revenue from the property tax on roadbed and track in the Southeast
Corridor (Washington, D. C., to Richmond) ranged from a low of 0.01 percent
of total property tax revenue in Fairfax County to 3.6 percent of total
property tax revenue in Caroline County.
The localities in this portion of the Southeast Corridor collected a total
of $3.1 million in property tax on railroad property, with $1.5 million, or
about 50 percent of the total, coming from the tax on the roadbed and track.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 26
35
The Effect on Other State and Local Tax Revenues Is Unclear
S. 250?s effect on other tax revenue is unclear because
state corporate income tax revenues will depend on how income will be
attributed to the exempt railroad property,
sales tax revenue will depend on any existing exemptions or special rates
for the acquired property, and
revenue from sales and corporate income taxes (as well as the property
tax) will depend on what properties would be acquired or improved with the
proceeds of the Amtrak bonds and state or local tax exempt bonds issued to
support these projects and what rail lines would be leased by Amtrak.
36
The Financial Benefits to Freight Railroads Appear to Be Limited
The freight railroads we contacted do not see large financial benefits from
participating in high- speed passenger rail systems.
The bill could exempt freight railroads from certain local, state, and
federal taxes. As stated previously, it is unclear how the state and local
exemptions would be implemented and to what they would apply. This is also
the case with the federal exemptions.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 27
37
Freight Railroads
IRS and Treasury officials said it would be difficult to implement the
federal tax exemption as written. Neither the bill nor existing tax laws
provides guidance on how to determine the amount of income attributable to
the
?acquisition, improvement, or ownership of? property
?funded? by Amtrak bonds. IRS would have to develop an approach for making
this determination.
Amtrak interprets the federal exemption as simply excluding any amounts
paid for an acquisition or improvement from the incomes of freight railroads
in the year that the acquisition or improvement occurs.
38
Freight Railroads
Clarification of the bill?s wording would resolve the potential differing
interpretations.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 28
39
Freight Railroads
The four major freight railroads we contacted were unsure if tax- exemption
provisions in the bill would provide significant financial benefits.
While the railroads recognized that some tax relief could be realized from
S. 250, they said the tax benefits did not appear to be significant.
The railroads stated they were unlikely to lease additional rail lines to
Amtrak, even though they could receive tax exemptions, if they had to give
up train dispatching rights. Bill sponsors expect that these provisions will
be removed.
40
Freight Railroads
The freight railroads provided examples of how passenger rail could have a
negative financial impact on operations including increased maintenance
costs, increased equipment costs not necessary for freight operations, and
reduced time available to move freight.
As a result, the freight railroads had mixed reactions about participating
in high- speed passenger rail projects.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 29
41
Freight Railroads
Two of the railroads stated they would work with the states in further
developing passenger rail service.
One railroad stated it currently has agreements with three states to
participate in passenger rail projects.
Another railroad stated it preferred to work with states on projects that
did not require it to share its track.
42
Freight Railroads
However, the remaining two railroads were reluctant to participate in
additional high- speed passenger rail projects.
They stated there would be no room for additional passenger trains in some
of their urban areas.
One freight railroad stated it would not allow passenger trains traveling
at speeds higher than 90 mph to share its right- of- way.
The other freight railroad stated it would not enter into any passenger
rail agreements unless another party assumed 100 percent of the increased
maintenance costs.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 30
43
States Can Use Federal Funds for Matching Contributions
S. 250 has two provisions that when read together would allow states to use
federal funds for their matching contributions for projects on designated
corridors.
One provision prohibits states from using federal funds, including amounts
made available from the Highway Trust Fund, for matching contributions
required for bond issuance, subject to a specific exception.
44
Use of Federal Funds
The exception largely defeats the prohibition. This exception appears to
allow states to use federal funds for their matching contributions for
projects on designated high- speed rail corridors, as well as the value of
land to be contributed for right- of- way.
Bill sponsors expect that revisions to the bill will prohibit states from
using federal funds, including amounts made available from the Highway Trust
Fund, for matching contributions.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 31
45
Bond Proceeds Appear Unavailable for Prior Amtrak and State Debt
The bill implies that bond proceeds would not be available for costs or
indebtedness incurred by Amtrak prior to enactment.
The bill does not explicitly prohibit Amtrak from using the bond proceeds
for prior debts, except in connection with refinancing. However, the general
principle against retroactive application of statutes, together with the
bill?s language and purpose, support this interpretation.
An explicit provision on the issue would remove any doubt.
46
Prior Debt
In addition, while the bill implies that bond proceeds are to be invested,
it does not expressly direct Amtrak to make investments (or specify the
types of investments), segregate bond proceeds from other funds, or
separately account for these amounts. An explicit provision covering the
treatment and use of bond proceeds between the date of receipt and
expenditure for qualified projects would help to eliminate the possibility
that bond proceeds would be available to Amtrak for other purposes,
including prior debt.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 32
47
Prior Debt
The bill similarly suggests that bond proceeds would not be available to
states for costs incurred prior to enactment for reasons like those
applicable to Amtrak.
Bond proceeds would clearly be available for state costs incurred after
enactment but prior to bond issuance to fulfill statutory requirements
necessary for project implementation.
Amtrak believes that proceeds would be available to states for costs
incurred prior to enactment to fulfill such statutory requirements.
An explicit provision on this issue would eliminate the lack of clarity.
48
Observations
In March 2001, we testified that a number of benefits to the public-- such
as reducing congestion and increasing travel choices-- have been attributed
to high- speed passenger rail systems. These claimed benefits need to be
realistically examined to guide the Congress in its decisions over
potentially large funding of such systems.
The bill provides DOT?s Inspector General with a programmatic role--
determining that selected projects would be financially beneficial to
Amtrak. This role may affect the IG?s independence in auditing the bond
program.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 33
49
Observations
The bill provides that projects to be funded with Amtrak bonds are to be
expected to result in positive financial contributions to Amtrak. However,
those projects that might make the greatest contributions to national
transportation goals may not necessarily make the greatest (or any)
financial contribution to Amtrak and vice versa.
50
Observations
Several uncertainties are associated with this funding mechanism.
The bonds might generate more (less) than the expected amounts for high-
speed rail projects if the bonds are issued at a premium (discount). It is
not known whether any premiums or discounts would be significant.
Project costs could grow beyond bond proceeds.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 34
51
Observations
There are reasonable scenarios where the amount of money in the trust fund
would be sufficient to repay the bonds? principal. Under other scenarios,
the amount in the trust fund would not be sufficient. If the amount in the
trust fund is insufficient to repay the bonds? principal, the federal
government could be asked to honor Amtrak?s obligation to the bond holders,
despite the absence of a federal guarantee.
Investors may be reluctant to purchase bonds until IRS issues its
regulations. This could delay the start of the bond program.
52
Scope and Methodology
Interviewed officials from Amtrak, IRS, the Treasury, FRA and DOT?s Office
of Inspector General.
Interviewed representatives from four major freight railroads,
Obtained capital estimates from representatives of 20 states within the
federally designated corridors. We did not review or verify these estimates.
Reviewed S. 250, Amtrak?s 2001 capital and finance plan, FRA reports on
high- speed rail, and selected state passenger rail improvement plans.
Enclosure II
GAO- 01- 756R High- Speed Rail Investment Act of 2001 35
53
Scope and Methodology Cont.
Estimated total cost to Treasury under a number of plausible assumptions.
Interviewed tax officials from 5 states and obtained property tax data on
railroad property.
Enclosure III 36 GAO- 01- 756R High- Speed Rail Investment Act of 2001
Methodology for Estimating the Cost of the Bond Program and Annual
Appropriations as an Alternative
We estimated three separate components of the potential revenue loss to the
Treasury as a result of the bond financing program that S. 250 would
establish. The predominant cost of the program would be the tax credits that
Treasury would give to bond purchasers in lieu of interest payments from the
bond issuer. Smaller additional revenue losses could also arise from the
issuance of tax- exempt bonds by state governments to finance their matching
contributions and Amtrak?s use of accumulated operating losses to offset
income generated by the trust account that would be used to pay off the
bonds. We also estimate the costs of a hypothetical alternative grant
program funded and a sinking fund arrangement, both funded by annual
appropriations which would provide the same amount of money for highspeed
rail projects as S. 250. We computed all of our estimates in both nominal
dollars and present values. 10
The Cost of the Tax Credits
We estimated the amounts of credits that the Treasury would pay by obtaining
projections of the future rates of credit and then multiplying these rates
by the amount of bonds that we assumed would be outstanding each year. S.
250 sets the rate of credit on the Amtrak bonds equal to ?an average market
yield (as of the day before the date of sale of the issue) on outstanding
long- term corporate debt obligations.? A Treasury official told us that the
credit rate would likely be set equal to an average of the corporate AA 20-
year bond rate. To get projections of this average rate, we obtained the
latest AAA corporate bond projections from the Congressional Budget Office
and adjusted these projections for the historical difference between AAA
corporate bond rates and AA corporate bond rates. Given the uncertainty
surrounding future interest rates, we computed alternative estimates using
interest rates that were 0.5 percentage points above and below this adjusted
projection. Our computation of the number of bonds outstanding in each of
the next 30 years is based on the assumptions that (1) Amtrak would issue
bonds up to the full limit and (2) Amtrak would use the longest allowable
term for each issue- 20 years. 11
10 The discount rate that we used for our present value computations is the
interest rate on Treasury debt with a maturity that is equal to the length
of the stream of benefits/ costs of the activity being examined. Given that
these rates change from year to year, we computed alternative estimates
using discount rates that were 0. 5 percentage points above and below the
relevant interest rates.
11 To reflect normal start- up delays, we assume that only one- fourth of
the annual limit would be reached in the first fiscal year that the bonds
were allowed. The remainder of the limit would be reached in the following
fiscal year. For each of the next nine annual tranches of issuance
authority, we assume that half of the limit would be reached in the first
fiscal year and the remainder of the limit would be reached in the following
year.
Enclosure III
GAO- 01- 756R High- Speed Rail Investment Act of 2001 37
Potential Cost of Additional Tax- Exempt Financing
To estimate a likely upper bound for any revenue loss that would occur if
states financed their matching contributions by issuing tax- exempt bonds,
we used the following assumptions:
States would issue $2.4 billion of tax- exempt bonds (that they would not
otherwise have issued) over a 10- year period and that each bond would have
a 20- year term.
If the new tax- exempt bonds were not available to investors, those
investors would have purchased assets yielding an 8- percent taxable rate of
return. This rate is approximately equal to the upper bound projections we
use for the corporate bond rate.
The average marginal tax rate of the bond purchasers is 31 percent. 12 The
loss to Treasury is equal to the tax rate multiplied by the taxable return
that the investors otherwise would have earned.
Potential Cost Associated With the Use of Amtrak?s Accumulated Losses
State matching contributions and Amtrak?s earnings from the temporary
investment of unspent bond proceeds are to be placed in a trust account.
Amtrak intends to offset the income of the trust account with accumulated
and future net operating losses, thereby avoiding the payment of tax on that
income. In the absence of S. 250, the money in the trust account might be
held by private sector investors who would earn a taxable return on those
funds. This shifting of funds from taxable investments into a tax- sheltered
investment would result in a revenue loss to the Treasury equal to the
difference between any tax that Amtrak might pay on fund earnings and the
amount of tax that otherwise would have been paid by the private investors.
The size of the revenue loss would depend on three factors: 1. the extent to
which Amtrak has losses available to use that (in the absence of S.
250) it would not otherwise be able to use; 13 2. the extent to which the
money placed in the trust account is obtained from the
private sector, where it would otherwise be earning a taxable return; 14 and
3. the amount of earnings that the trust account generates.
12 Purchasers of tax- exempt bonds tend to be in higher income tax brackets.
Other analysts have assumed the average marginal tax rate for these bond
holders to be about 28 percent. We use a slightly higher rate to ensure that
our estimate is an upper bound.
13 If Amtrak could use the losses even without S. 250, then the bill would
not result in an additional loss for the Treasury. 14 If states were to
finance their contributions by cutting back on other spending that they
would have done, rather than by raising taxes or borrowing, then those
contributions would not take money out of the private sector.
Enclosure III
GAO- 01- 756R High- Speed Rail Investment Act of 2001 38 To estimate a
likely upper bound for the revenue loss that could occur if Amtrak had
$5 billion in tax losses that it otherwise could not use, 15 we assumed the
following:
State contributions would equal 25 percent of bond proceeds (because
Amtrak expects that states will contribute more than the minimum match).
All of these contributions would be obtained by taxing or borrowing money
from private individuals whose average marginal tax rates are 31 percent.
For each issue of bonds, 90 percent of the proceeds would remain unspent
in the first year, and this amount gradually would be reduced to zero by the
end of the sixth year. Amtrak assumes that a maximum of 20 percent of the
bond funds would be spent in the first year and not more than 40 percent in
the next year. In this upper- bound scenario, we estimate what would happen
if Amtrak were to generate higher earnings for the trust account by spending
the bond proceeds more slowly.
The funds in the account would earn an annual rate of return slightly over
6 percent, which we assume is the same return that the private sector
investors would have earned in the absence of S. 250. 16
We computed how much tax would be paid on the investible funds under these
assumptions if S. 250 were adopted and how much would be paid if S. 250 were
not adopted. The revenue loss to Treasury equals the difference between the
two amounts.
Cost of the Alternative Grant Program
To estimate the present value cost of the grant program funded by annual
appropriations, we assumed that the timing of the grant payments would be
the same as the timing of the bond issues. We then applied the discount
rates identified above.
15 Amtrak?s latest financial statement notes that, as of the September 30,
2000, the company had accumulated over $5 billion in net operating losses,
which it does not expect to use (in the absence of S. 250). Prior to 1998,
Amtrak issued preferred stock to the Department of Transportation in amounts
equal to all federal operating subsidies and most federal capital subsidies
that it received. For this reason, Amtrak?s accounts did not treat these
subsidies as income. The Amtrak Reform and Accountability Act of 1997
established that Amtrak would no longer issue preferred stock in exchange
for federal grants. If future federal subsidies are treated as taxable
income to Amtrak and these subsidies were large enough to offset future
operating losses, including depreciation, then Amtrak would not accumulate
further losses for tax purposes.
16 This is the rate of return that would maximize the loss, given the
combination of other assumptions used in this scenario. A higher rate of
return could reduce the revenue loss if Amtrak does not generate additional
operating losses (including depreciation) in the future. This is because,
once Amtrak uses up all of its losses, the income in the trust account could
be subject to a 35- percent corporate tax rate, while the private sector
investors are assumed to pay tax at a rate of no more than 31 percent.
Amtrak would pay tax only if it actually became profitable on its own
account or if the federal government subsidized it beyond the break- even
point.
Enclosure III
GAO- 01- 756R High- Speed Rail Investment Act of 2001 39
Cost of Amtrak?s Sinking Fund Alternative
To estimate the cost of Amtrak?s sinking fund alternative, we calculated the
size of the appropriation that would be needed to generate $960 million of
spending in each of the next 10 years, using both the 6 percent rate of
return that Amtrak assumed and an 8 percent rate of return (roughly
equivalent to the upper bound we use for the AA corporate bond rate). We
also varied our assumption concerning Amtrak?s ability to offset the income
of the fund with its accumulated tax losses. One assumption was that Amtrak
could offset all of the fund?s earnings with its accumulated losses; the
alternative assumption was that it could not offset any of the earnings. 17
As it turned out, varying the assumption about the accumulated losses did
not have a significant effect on our results. If Amtrak were able to offset
the fund?s earnings, then the size of the required appropriation would be
smaller; however, this benefit to the government would be offset by the
additional revenue loss associated with Amtrak?s use of accumulated losses
that would otherwise expire. The total cost to the Treasury of the sinking
fund alternative could be as low as $7 billion if the fund could earn an 8
percent rate of return or as high as $8.4 billion if the fund earned only a
6 percent rate of return. 18 The higher cost estimate includes the potential
cost associated with states issuing tax- exempt bonds to finance their
matching contributions.
17 The losses that Amtrak has accumulated to date would be more than
sufficient to offset all of the earnings of the fund, unless Amtrak
generated other significant sources of income against which the losses could
be used. We used the same assumptions regarding the average tax rate of
private sector investors that we used for our other revenue loss estimates.
18 The lower cost estimate for the sinking fund is less than the lower cost
estimate for the annual appropriations because the 8- percent rate of return
is higher than the government?s discount rate.
Enclosure IV 40 GAO- 01- 756R High- Speed Rail Investment Act of 2001
Comments from Amtrak
Enclosure IV
GAO- 01- 756R High- Speed Rail Investment Act of 2001 41
Enclosure IV
GAO- 01- 756R High- Speed Rail Investment Act of 2001 42 (392007)
*** End of document. ***